the short and medium-term impact of brexit on the retail ... · 1 [email protected] the...
TRANSCRIPT
The short and medium-term impact of Brexit on the retail sector
• In the immediate aftermath of the Brexit vote, political uncertainty had led to a dampening of
consumer confidence
• In the medium-term, as currency hedging unwinds, the cost of goods purchased overseas will
effectively become more expensive. The debate for retailers will then be whether to increase
prices or absorb the loss into margins
• In the long-term, key considerations will be: the retail sector’s reliance on non-UK workers;
trade deals, and the potential positive opportunities for retailers
4 August 2016
Introduction: Following the UK’s decision to leave the EU, British retailers and consumers undoubtedly face an
unprecedented situation, one filled with uncertainty.
Looking back to the day of the result itself (Friday 24 June 2016), in many ways the Brexit result was
met with disbelief – not least of all by the retail industry. Martin Hayward, Founder of Hayward Strategy
and Futures, noted that the combined might of the research industry failed to anticipate or predict the
majority view of the British population, illustrating the level of surprise.
James Knightley, Senior UK Economist at ING, noted that the overwhelming majority of surveys had
suggested that British businesses had wanted the UK to stay a member of the EU. However, David
McCorquodale, Head of Retail at KPMG, noted that many retail CEOs, particularly from the large
national chains, had been careful not to take sides for fear of alienating their brand in such a divisive
landscape. ‘After all retail, like democracy, is controlled by the people’, he added.
Surprise aside and with the result of the EU referendum now unquestionable, what does this
momentous decision mean for retail?
The KPMG /IPSOS Retail Think Tank (RTT) met in July (Tuesday 12 July) to discuss the short and
medium-term effects of Brexit on the Retail sector. Given the magnitude and unprecedented nature of
Brexit, a number of considerations came to light but common themes arose.
In the short-term, key themes discussed by the RTT included: a weaker pound, fragile consumer
confidence and political uncertainty. Meanwhile, in the more medium-term, the prospect of higher tariffs
with trade restrictions; a more limited labour supply, and how retailers could benefit from positive
opportunities in light of Brexit, were on the minds of the RTT members.
Immediate and short-term impact: In the immediate aftermath of the Brexit vote, the RTT widely recognised that uncertainty – particularly
political uncertainty - has led to a dampening of consumer confidence, the driver of the retail sector’s
fortunes.
Mike Watkins, Head of Retailer and Business Insight for
Nielsen UK, stressed that the psychology of the consumer
was critical, and collectively the RTT members agreed that
this uncertainty wasn’t likely to be viewed favourably by
consumers. For continued retail growth, consumers either
need to ‘feel’ or ‘be’ better off, but in the face of this uncertainty this is unlikely, Mike Watkins added.
While future retail consumption may waiver, several members of the RTT suggested that in the short-
term pre-planned purchases, like holidays for example, were unlikely to change as consumers have
already made the commitment.
For retailers on the other hand, this political uncertainty was of equal concern, as Maureen Hinton at
Verdict Retail added: “not only is it a drag on consumer confidence but also it prevents retailers making
concrete business plans. Until they know how the UK government intends to tackle the issues around
the exit from the EU, there is little retailers can do apart from consider every eventuality.”
Dr Tim Denison, Director of Retail Intelligence at IPSOS Retail Performance, suggested that the:
“…sharp shock being felt following the Brexit decision [was] political rather than economic; [with] the
fundamentals of the latter remain[ing] solid.” However, Nick Bubb, Retail Consultant, noted that: “the
share prices of general retailers slumped in the immediate aftermath of the shock Brexit vote, as the
City moved quickly and brutally to [factor in] a future UK recession and sustained sterling weakness.”
According to Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, retail real estate
experienced a similar fate. He highlighted that the relatively illiquid nature of commercial real estate
resulted in such funds coming under considerable pressure to be sold (both high street and mall), at a
level significantly below their recent valuations. Concerns over whether this trend would extend to
residential property was also flagged by other members.
There was general consensus among the RTT that some specific retail industries were likely to be more
affected by the vote to leave than others in the short-term. Nick Bubb flagged that the share prices of
‘big ticket’ related companies, those related to the housing market (like furniture retailers), as well as
motor retailers, had been particularly hard hit post Brexit. “On the basis of historical precedents…this is
where consumers will rein in their spending first, in response to heightened uncertainty and worsening
outlook for jobs and house prices”, he said.
Martin Newman, CEO at Practicology, reinforced this theme noting that fashion was already on sale
prior to Brexit, but the move towards promotional activity now appears to have spread to most of the
high street. “Fashion retailers are most at risk due to the fact that they buy most of their goods overseas
and pay in dollars, meaning they will be significantly impacted by increased import costs due to the
rapidly failing value of the pound”, he added.
While specific retailers may have experienced the immediate impact of Brexit more than others, it was
widely suggested that in the short-term there are all sorts of reasons why consumers could simply keep
on spending. Nevertheless, Dr Tim Denison flagged the need for timely promotions to encourage
consumers to ride out the uncertainty.
Medium-term impact:
As briefly eluded to, less favourable exchange rates for British retailers were a consideration for the
RTT. James Sawley, Head of Retail & Leisure at HSBC noted that: “general retailers have a significant
requirement for Dollars either directly or indirectly via wholesalers and distributers further down the
supply chain.”
While the retail industry may not consider this an immediate worry, as most retailers hedge their
currency exposure (typically between 9 to 18 months), the cost of goods purchased overseas will
effectively become more expensive as hedging unwinds.
(Though this is of course based on the assumption sterling
continues to be devalued.)
As a result, the RTT agreed that some of the burden created by less favourable exchange rates may
eventually need to be shared with consumers by way of increased prices. However, the debate then
moves to whether this is possible in a price conscious, competitive environment, or whether retailers
may have to absorb the loss into margins. For smaller retailers, who are unlikely to have hedged against
such a scenario, this burden will be particularly hard to bare.
Whilst hedging for less favourable exchange rates may assist in delaying price rises 9 – 18 months,
Maureen Hinton suggested that: “we are likely to see some rises in food [prices] before then, as the
cost of ingredients increases for food manufacture. However, price competition among major
supermarkets will dampen [such price rises].”
Following on from the latter point, Nick Bubb suggested that: “this is not such a bad scenario for the
beleaguered food retail industry, which is currently bedevilled by food price deflation, but has historically
enjoyed periods of food inflation. However, the concern is that the rise of the discounters and the surplus
superstore capacity in the market, as online grocery shopping and convenience store shopping gain
ever more traction, is causing deep-seated structural change in the industry.”
With respect to margins, several members of the RTT highlighted that the combination of higher import
costs due to the decline in the value of the sterling, coupled with the implementation of the National
Living Wage, would result in increased cost pressure on retailers. Jonathan De Mello noted that this
could result in domestic retailers halting or slowing expansion within the UK, however other members
of the RTT suggested that pressure on margins could provide a catalyst for accelerated efficiencies
within the retail sector.
Looking ahead:
As noted by many members of the RTT, what we are witnessing in the immediate aftermath of the vote
comes ahead of the UK having even triggered Article 50. Details of our exit will only become clearer
following negotiations and as one RTT member suggested, it is yet to be determined ‘whether the UK
can achieve an amicable divorce from the EU’.
With this in mind, the timescales relating to Brexit were considered to be as uncertain as the outcome
of negotiations themselves, however the medium-term could be considered to denote the period
between the end of this year and the point at which negotiations have completed, while the long-term
refers to the period beyond.
A key long-run consideration identified by the RTT was the retail sector’s reliance on non-UK workers.
As there will be two year consultation following the activation of Article 50, nothing is yet set in stone.
However, the RTT agreed that growth in the retail sector was not dependent on cheap labour, and there
was widespread agreement that it was unlikely migration would be stopped completely, but rather
restrained if anything. However, it was noted that retail had fished in the wider European market for
specialists in data, analytics and digital, and should restrictions be applied, the talent pool would be
smaller for these specialisms.
Trade deals are naturally another key consideration, though David McCorquodale highlighted that he’d
find it hard to believe that the UK would simply “pull up the drawbridge to trade or that our farmers
[would] not be supported to produce our food.” He
commented: “consumers will still want to shop and retailers
will still excel in meeting demand. Already, low growth,
increased costs, changing technologies, productivity and
efficiency have all been driving and influencing retail strategy,
and this is likely to accelerate over the next few years.”
However, Maureen Hinton noted: “while the UK can gain from freer access to global markets, until these
deals have been established, UK retail is set for a period of volatility.”
Despite this, the RTT members veered away from focusing exclusively on a negative outlook,
suggesting that Brexit could open up positive opportunities for retailers. Mike Watkins proposed that
this was a time for retailers to ‘adapt or die’, noting that shopping behaviour has already changed.
James Sawley highlighted that: “with cost pressures mounting in areas such as staffing, transport and
energy costs, businesses have tough decisions to make which effect both customers and shareholders.
[However,] retailers with healthy balance sheets and healthy margins can afford to play the wait and
see game, keeping prices the same in order to protect or gain market share”.
Furthermore, Martin Hayward pointed out that the vote to leave could increase the importance of
provenance and “the opportunity, and legal permission, to promote locally sourced goods over imports,
adding extra impact to an already important trend in food and general retailing”.
Martin Newman added that: “there is potential for retailers to see a spike in demand online from
international customers who seek to take advantage of the weak pound.” UK luxury was identified as a
key sector likely to benefit from this, and the RTT noted that the “British” brand also exports well.
Nevertheless, a view shared by the RTT members was that British consumers will continue to shop and
that there will be naturally be winning and losing retailers as the Brexit landscape begins to take shape.
This process will take time, but as Martin Hayward stressed, details of the UK exit: “…will be slow to
emerge and probably less dramatic than we have been led to believe in the heat of Project Fear”.
Part II: In detail – Individual views of the KPMG/Ipsos Retail Think Tank members
James Knightley, Senior UK Economist - ING
In the near-term Brexit is unlikely be too damaging for consumer spending. Unemployment is low, wages have been rising in real terms and the sun is finally shining. It will be a different story in coming months.
Surveys had suggested that an overwhelming majority of British businesses had wanted the UK to stay a member of the EU. We had already seen hiring and investment spending slow in the lead up to the referendum. Now that Brexit is confirmed there are concerns that we could see expansion plans cut with businesses taking a more pessimistic view on the new environment.
For the retail sector, the plunge in sterling is bad news. While most companies will have implemented some currency hedging, the cost of imported goods will rise substantially at a time when increases in the living wage are adding to business costs. We have already seen petrol prices rise because of sterling’s plunge and we are likely to see this trend intensify. This will erode household spending power, while also pushing up retailers’ distribution costs. People who rely on income from savings are also going to suffer given the Bank of England has made it clear they will be cutting interest rates and are likely to implement additional QE.
There are signs of stress in commercial real estate already and the sense of caution may spread to residential property. Given this is viewed as a key barometer of the health of the UK we are concerned about the implications for sentiment and activity – and this is all happening before the UK has triggered Article 50 to start the two year countdown on the UK exiting the EU.
In terms of the negotiations, the key question will be whether the UK can achieve an amicable divorce from the EU, which will limit the economic pain, or whether it will break down in acrimony. If it is the latter, a toxic political environment could lead to protracted negotiations, resulting in significant economic distress for the UK and Europe more broadly. Foreign investors are also likely to take a dim view of putting money to work in the UK given the uncertainty over its future relationship with the EU. We will also have to wait and see if the Scottish nationalist movement launches a renewed push for independence. In this environment, a UK recession will be difficult to avoid.
Dr Tim Denison, Director of Retail Intelligence – Ipsos Retail Performance
Keep calm and carry on shopping! That is my short term message to the UK consumer. The sharp
shock being felt following the Brexit decision is politic rather than economic; the fundamentals of the
latter remain solid. Employment is at its highest rate since such records began in 1991, wage growth
has sat above inflation for 17 months and consumer confidence over their personal finances, major
purchase spending and future savings plans are planted firmly in positive territory. It is only consumer
confidence over the future state of the economy that is tumbling. So from a demand perspective it
should remain business as usual in the short term for shoppers.
Retail sales could, in fact, be boosted in the summer months while existing retailer hedging
arrangements remain in place, if they can successfully message shoppers to ‘buy now while prices are
low’. Early days admittedly, but our Retail Traffic Index figures show no dramatic year-on-year change
pre- and post- the vote. In the week following the 23rd, UK retail footfall was down 2.2% on the
corresponding week of 2015, compared to a deficit of 1.7% over the previous 4 weeks.
Beyond the short term, the weakened pound will inevitably mean that the cost of imported goods will
rise. Some of that burden will be shared with consumers. More emphasis will be given to UK sourcing
to reduce exposure to currency weakness and volatility. Higher retail prices at the pumps and in the
shops, a jump in inflation, potential delays in public spending programmes and private grandiose
schemes such as HS2 reducing job security, will all threaten demand in the near term, tempered by the
proven resilience of consumers.
We should acknowledge that retailers have come a lot way since the 2008 crash. They have become
more nimble and responsive as businesses to downturns in demand. The likes of production runs and
lease commitments are shorter. Nevertheless Brexit will undo some of the efficiencies gained from the
‘four freedoms’ and create a new raft of challenges for them. Logistics and distribution is an obvious
area for change and added complexity; so too internet selling and fulfilment to EU customers, currently
standing at 64% of online sales exports. To meet such challenges, retailers would do well to put
productivity at the top of their agenda, reassessing the contribution of all input costs against sales. Just
when we thought retailing couldn’t become more interesting, it suddenly has done.
David McCorquodale, Head of Retail – KPMG
The British people have voted to leave the European Union, so politicians and civil servants now have to negotiate the best possible terms for the whole country and attempt to reunite what is currently a divided public. This will take time, but meanwhile retailers - who are driven by daily demand, seasonal purchasing or even peak Christmas ordering - must deal with whatever consequences arise. To scope out the risks and opportunities we have been advising clients to consider the next two weeks, two months and two years - using this 2:2:2 model to assess the immediate, short and medium-term outlook for their business. In the immediate / shorter-term, key considerations for retailers are customers, currency and consumer confidence. Customers are the voters and many retail CEOs, particularly for the large national chains, have been careful not to 'take sides' in public pronouncements for fear of alienating their brand. After all retail, as in democracy, is controlled by the people. Currency presents another challenge, with the pound having weakened after the vote. While this is not an immediate worry for retailers as most hedge their currency exposure, the cost of goods purchases overseas will effectively become more expensive as hedging unwinds – unless, of course, the pound strengthens. For retailers the crucial decision will be whether to increase prices in this price conscious, competitive environment, or to absorb the loss into their margin. Those with significant overseas revenues will benefit in this case. Consumer confidence, the driver of the sector’s fortunes, has dampened somewhat in the immediate aftermath of the vote. The words and actions of our politicians may revive this but we first need the political seas to calm. In the short term, retailers will want confidence to improve before the golden quarter of Christmas but they will move into profit protection mode if this is not the case - impacting investment and employment. Looking to the medium term, there is less clarity, as we need to see what trade deals are negotiated. I can't believe we'll pull up the drawbridge to trade or that our farmers will not be supported to produce our food. Consumers will still want to shop and retailers will still excel in meeting demand. Already low growth, increased costs, changing technologies, productivity and efficiency have all been driving and influencing retail strategy, and this is likely to accelerate over the next few years. Employers may also have to look at a more domestic labour force to meet peaks in demand.
Should we have a period of sustained weak currency, overseas investors may feel that our companies are 'cheap' and may swoop to acquire, which would be rather ironic given the referendum result was more a drive for British sovereignty. Nevertheless, I feel that strong, well-financed retailers will see the current uncertainty as an opportunity to take market share. Many did this in the aftermath of the global financial crisis and, with growth rates remaining low, there will be casualties amongst those who don't adapt and invest. Change and uncertainty are feared by some but are viewed as an opportunity for the brave, and the brave have probably already started executing on their plans so the others will need to be fleet of foot in catching up.
Martin Hayward, Founder – Hayward Strategy and Futures
For all of us in retail who are forever trying to better understand and anticipate the needs of our customers, there are some interesting side lessons to be drawn from the recent referendum. Firstly, it’s not unfair to say that total reliance on sophisticated and expensive market research can be misleading. For the second time in just over a year, the combined might of the research industry has failed to anticipate or predict the majority view of the British population. The circumstances around polling political views are acknowledgeably complex, but we should all understand that sometimes our customers don’t necessarily share their real and deepest feelings through survey research and we should always combine survey findings with equal measures of intuition, behavioural observation and experimentation. This particular writer did just that and won a few quid at the bookies on the referendum result. The results also serve to reinforce the large divergences in the lifestyles and outlook of different parts of the country. London is undoubtedly an international City, but it is surrounded by more parochial regions focussed more on retaining their own identity. This has implications for staffing, product mix and brand positioning. The effects of the vote on the retail sector will take time to play out as we are looking at a likely two year transition process to Brexit. Stocks and the pound are flailing around in the immediate uncertainty but we can make a few early inferences:
Provenance will be even more important – the opportunity, and legal permission, to promote
locally sourced goods over imports adds extra impact to an already important trend in food and
general retailing.
Local recruitment and staff training may become more important as migration is controlled.
Greater competition for staff may in turn increase wages, and prices, but this will then stimulate
sales elsewhere and allow government support for the low paid to be invested more
productively.
As ever, a weaker pound will enhance international sales, whilst a stronger pound will reduce
import prices. With the Euro less than robust itself, it is a brave forecaster who can predict
which way this will ultimately go.
However, in the face of all the upcoming uncertainty, we can be confident that the British consumer will continue to shop, continue to buy French wines and German cars and the country’s manufacturers will sell British goods abroad. There will be winners and losers to different degrees, but until negotiations to leave are progressed they will be slow to emerge and probably a lot less dramatic than we have been led to believe in the heat of Project Fear.
Maureen Hinton, Verdict Retail
There are five major factors affecting retail as a result of Brexit; in the short term a weaker pound; fragile consumer confidence; and political uncertainty; while in the longer term; the prospect of higher tariffs with trade restrictions; plus a far more limited labour supply. The sharp drop in the value of the pound against the USD will increase supply chain costs as UK retail is so dependent on imports, most of which are bought in USD. Consumers have enjoyed next to no inflation, or even deflation, over the past couple of years, but retailers will be forced to pass on price rises to mitigate the impact of even higher costs on already squeezed margins. Because so many retailers have hedged their currency until Spring 2017 these price rises are unlikely to have a significant impact until late Q2 2017, though we are likely to see some rises in food before then as the costs of ingredients increase for food manufacturers. However price competition among the major supermarkets will dampen these. More immediately is weaker consumer confidence. This has fallen amid concerns about how Brexit will affect employment and incomes. The UK population has become well used to austerity since the recession and will retain the same habits, but will be more wary again of making big financial commitments, such as buying houses, until they have more confidence in their own personal economic prospects. This will hit the sale of big ticket items in the home related market, which had only just begun to recover from the recession. In the short term though, it is political uncertainty that is a major factor for retailers. Not only is it a drag on consumer confidence but also it prevents retailers making concrete business plans. Until they know how the UK government intends to tackle the issues around the exit from the EU there is little retailers can do apart from consider every eventuality. Higher tariffs and greater trade restrictions with the EU will impose more costs and curtail growth opportunities, while limiting free movement of labour will reduce a valuable resource for both retailers and their UK suppliers. While the UK can gain from freer access to global markets, until these deals have been established UK retail is set for a period of volatility. Martin Newman, CEO – Practicology In the short term, while the two main political parties scramble to find leadership and a plan for next steps, the consumer is waiting for the dust to settle and weighing up the potential consequences to them of Brexit. This is highly likely to affect consumer confidence in the domestic market and therefore suppress demand. We’ve already seen examples of where Brexit is having a negative impact on sales performance. Fashion was already on sale but post-Brexit its spread to most of the high street. Fashion retailers are most at risk due to the fact that they buy most of their goods overseas and pay in dollars, meaning they will be significantly impacted by increased import costs due to the rapidly falling value of the pound. Although some retailers will have hedging in place, the currency hit will affect many smaller retailers and also some larger ones such as Sports Direct, which warned the stock market within hours of Brexit that profitability will be impacted due to currency volatility. However, there is also the potential for retailers to see a spike in demand online from international customers who seek to take advantage of the weak pound.
Luxury is the one sector likely to benefit most from this, albeit this will have margin implications. The concern over the implications of Brexit are likely to lead to the short-term reluctance among retailers to make significant capital investments, and may also lead to a slowdown in hiring. The projects requiring significant investment that could be affected in the short term include:
Large investment in IT and systems
The roll out of new stores
Store improvement or upgrade programmes
Large business transformation projects
Marketing activity
Head office investment Depending upon how much consumer confidence and demand are affected, over the medium term, this could also lead to redundancies and store closures. The potential suppression of demand in the domestic market could lead to retailers driving their internationalisation strategies (Online and offline). Retailers may view the (potential) stability of other markets as being more attractive for growth opportunities. However, Brexit may well have a significant impact upon the EU economy as a whole; and therefore may also be a driver for retailers to pursue opportunities in AsiaPac, North America and other geographies. The UK is also likely to be viewed less favourably as a potential regional base by international retailers. Therefore, brands such as Alibaba who set up their International HQ in the UK, may in future decide that being located within an EU member state is preferable. In the longer-term, the threat of trade tariffs with EU countries is another concern retailers will need to address. Mike Watkins, Head of Retailer and Business Insight – Nielsen UK Like the industry as a whole, consumers are in a state of shock at the moment following the result of the referendum. So it`s of no surprise that we are seeing (and will continue to see) dramatic swings in consumer confidence, as sentiment is shaped by what shoppers are absorbing from the media. At times of uncertainty, consumers look to home and family for support networks, which means that in the short term (the next 6 to 9 months) retailers will need to reinforce and message that they are `here to help`, be it good prices, customer service or the feel good of the overall shopping experience. Empathy will go a long way to re building consumer confidence and helping spending intentions albeit this will be more of challenge in non-food than in food retail. In the short term we can expect shoppers to look to save more or pay off debts rather than increase discretionary spend and this could have a ripple effect on many retailers. What retailers also need to reflect upon is that the top consumer concerns have been for some while, job security and the economy as well as terrorism, immigration (Nielsen Consumer Confidence Survey 2016).This shows that consumers still recall the economic pain and changes that had to be made in household expenditure in recent years, even if many households are now financially better off than at the height of the last recession, helped by low mortgage rates, falling energy and fuel prices and 3 years of price deflation in retail.
In the medium term (12 to 24 months) and as the impact of any change to monetary and fiscal policy becomes clear and are felt by shoppers - and assuming some course correction - retailers will need to accelerate changes strategies already in place. These need to include simplification, address overcapacity as the result of multi-channel shifts in spend, better analytics, innovation in service and product that gives real benefits, and of course, continually revisit what `value for money` means for loyal shoppers (those who are advocates, shop most often and spend the most money). For Supermarket shoppers we can expect renewed interest in seeking out cheaper brands (or brands at lower prices) and the safe haven of good value private label. Expect a continuation of wasting less (fresh) food and no return to larder stocking. Savings on `core` groceries will allow spending to be maintained on added value, indulgent and affordable treats, goods and services. Big changes to the broad customer proposition should only be necessary for the minority of retailers as it’s adapt or die! Shopping behaviour has already changed and the expected implications of Brexit such as an increase in some retail prices and a more cautious consumer will simply reinforce a mind-set that is already in place. Nielsen research shows that 20% of shoppers claim not to have any spare cash but this also means that 80% do, so even if the retail pie does not grow as fast, gaining a bigger slice would seem to be an attractive strategy. Jonathan De Mello, Head of Retail Consultancy – Harper Dennis Hobbs
Brexit has already had a considerable and immediate impact on retail real estate in the UK, given the
recent suspension of UK property fund redemptions due to exceptional liquidity pressures – including
Aberdeen, Henderson, Columbia Threadneedle, Canada Life, Standard Life, Aviva and M&G, with more
suspensions to inevitably follow. As a result of the relatively illiquid nature of commercial real estate,
these funds are under considerable pressure to sell assets (both high street and mall) at a level
significantly below their recent valuations. In terms of what would essentially be a forced sale, it would
be ‘non-core’ assets in secondary retail centres that would be sold off first – as investor perception,
correctly, would be that such centres are most at risk from dampening retail occupier demand. This
would be quite a profound setback for such centres, some of which are still –even now - recovering
from the recession in 2008 – with high levels of vacancy and retail business failure. Whilst a combination
of the internet/multi-channel retail – in addition to the recession – was the cause of the decline of these
centres then, there is less light at the end of the tunnel for these centres this time, unless a ‘soft landing’
deal can be negotiated with the EU, whereby Britain trades within a wider free-trade ‘European
Economic Area.’ This looks quite far away from happening currently however, given the ‘quickie divorce’
rhetoric emanating from some quarters of the EU.
Should a soft landing fail to happen, retail in the UK will be a less exciting place, as domestic retailers
halt or slow expansion within the UK in order to necessarily focus on considerable cost pressures
derived from a combination of higher import costs due to the decline in the value of sterling, and the
national ‘living wage.’ International retailers will similarly seek to reduce their exposure to the UK, and
the UK’s status as the principal foothold for US brands seeking to enter the European marketplace will
be threatened given the UK would be subject to standard EU barriers to trade. The government has
tried to pre-empt any reduction of FDI into the UK through a planned reduction in corporation tax
(already lower than EU peers such as Germany, France and Italy) to ‘below 15%.’ It will be interesting
to see how the government plan to finance this however, as if the plan is to do so with income tax/VAT
rises, then this would impact already fragile consumer demand.
Brexit would make Paris – London’s only major competitor from a retail perspective – more attractive;
albeit London, particularly when Crossrail is up and running, will still be considerably ahead from a retail
spend perspective. However, whilst retailer demand will remain strong – and likely be consolidated in –
the UK’s principal retail centres (such as major cities and large out of town malls) secondary retail
centres will clearly not be so lucky. In such centres tenants will seek to negotiate rental discounts/exit
on lease expiry and landlords will be forced to reduce rents in order to maintain occupancy levels.
Property investors with considerable exposure to secondary centres had better pray for a soft landing,
or - even better – a second referendum!
Nick Bubb, Retail Consultant
The share prices of General Retailers slumped in the immediate aftermath of the shock Brexit vote, as
the City moved quickly and brutally to discount a future UK recession and sustained sterling weakness.
This is, of course, what the stockmarket does, ie one of its functions is to discount future events and
share prices in the General Retail sector have been telling us that the probable outlook for sales and
profit margins is distinctly poor, in the light of the “Brexit” vote on June 23rd.
Where the balance of short-term and medium-term lies is unclear: if the normal time horizon in the City
is about 6 months out then the scenario being discounted is a poor Christmas, although the underlying
concern is about the outlook for 2017, as the weakness of sterling will then start to feed into higher
import prices, other things being equal.
Ironically, this is not such a bad scenario for the beleaguered Food Retail sector, which is currently
bedevilled by food price deflation, but has historically enjoyed periods of food price inflation. However,
the concern is that the rise of the discounters and the surplus superstore capacity in the market, as
Online grocery shopping and convenience store shopping gain ever more traction, is causing deep-
seated structural change in the industry. And investors are nervous that Asda will set off a renewed
price war to stop its persistent loss of market share, so the share prices of Food Retailers have not
been completely immune to the recent uncertainties.
However, the share prices of the “big ticket”, housing market related companies (like Furniture retailers),
as well as Motor retailers, have been hit particularly hard since Brexit, as the City thinks, on the basis
of historical precedents, that this area is where consumers will rein in their spending first, in response
to heightened uncertainty and a worsening outlook for jobs and house prices.
Needless to say, there is not much evidence for this yet, but the City has chosen to shrug off any
reassuring noises. This Topps Tiles reported on July 6th that the previous quarter’s trading had been
reassuringly strong (despite the recent impact of Euro 2016 on the attentions of many of its core
customers) and yet it still saw its share price fall even further last week…In much the same way, Seb
James, the CEO of Dixons Carphone, said on June 29th that UK sales had been up since the Brexit
vote, but his share price has still been savaged.
Of course, in the very short term, there are all sorts of reasons why consumers can seem to be keeping
on spending, with the weather often the driving factor and the fact is that the recent cloudy and cool
weather has been quite helpful to “indoor” retailers of homewares, furnishings and appliances etc (in
contrast to the unhelpfully hot weather that we enjoyed a year ago, which meant the comps for post-
Brexit sales have been relatively soft for such retailers).
Thus, there was no sign of a Brexit slump at the great Retail bellwether John Lewis in w/e July 2nd,
with gross sales up by 2.1% (broadly flat on a LFL basis), but trading was helped by the cool weather
and the earlier start to Clearance this year, so we will have to wait to see an underlying trend emerge
here.
Ironically, the weather shift against last year has hurt John Lewis’s sister company, Waitrose, which
saw sales c5% down LFL in w/e July 2nd, impacted by a tough comp (good picnic and barbecue
business on the back of the sunny weather a year ago, plus the “Pick Your Own Offers” launch hype)
and the cooler weather this year.
Another weekly sales survey is that produced by the accountants BDO for small and medium-sized
non-food retailers and w/e July 3rd was actually not great, with overall Store LFL sales down by 1%,
but this survey is nearly always gloomy, partly because it excludes Online sales…
In much the same way, the various High Street footfall surveys have been negative post-Brexit, as Dave
Forsey, the MD of Sports Direct, pointed out on July 7th, but footfall figures have consistently been
negative, partly because of Online sales growth…so this doesn’t tell us that much.
Talking of Sports Direct, however, moves the subject onto the impact of the post-Brexit slump in sterling
on the dollar-based Overseas sourcing of Fashion retailers, because Sports Direct is the most exposed
to this, having had to confess that it had no hedging in place for this sort of eventuality…If sterling stays
at around $1.30, the impact on Sports Direct’s gross margins next year will be material, assuming it is
unable to pass higher prices on to the consumer.
It would have been helpful if Sports Direct had tried to quantify this downside risk to gross margins with
its final results, but for the time being it is hiding under the “too soon to tell” mantra.
The definitive word on the subject of Overseas sourcing margins and the impact of the weakness in
sterling for Fashion retailers will doubtless come from Simon Wolfson, the highly-regarded CEO of Next,
in the Next Q2 trading update scheduled for August 3rd.
Around that time in early August, we will also get an early view of how “white van man” is reacting to
the change in the climate in the building trade post-Brexit, with the Travis Perkins interims on August
2nd likely to provide an important barometer of this side of the trade.
Unfortunately, it is clear that the feeble UK economic recovery has been slowing anyway in recent
months and, given the general shock to consumer confidence from the Brexit vote and the negative
impact on the London jobs and housing market in particular, it is not surprising the City moved so quickly
to price in the risk of a recession and sustained sterling weakness (although it has also recognised the
benefit on FX translation to retailers with significant Overseas earnings).
Markets can over-shoot in both directions and some of the recent share price falls were overdone, but
the direction of travel for the domestic economy is clear, with the Bank of England’s latest monetary
policy easing likely to be increasingly ineffective.
James Sawley, Head of Retail & Leisure, HSBC
The votes are in and Britain is out. The reaction of the equity and credit markets confirm how investors
perceive the short and medium term risks, and they are concerned. Immediate attention has turned to
USD exposure and the outlook for Cable.
General retailers have a significant requirement for Dollars either directly or indirectly via wholesalers
and distributors further down the supply chain. Companies are typically hedged between 9 and 18
months out, so are covered for two to three seasons. This is therefore a strategic challenge for the
second half of 2017 onwards. While all retailers are in the same boat, some will be able to weather the
stormy seas better than others. Consequently I expect to see a range of approaches to how imported
inflation is dealt with.
Retailers selling price inelastic products such as food or low ticket items, and those with a category
leading value proposition or significant brand equity, will be able to flex prices with minimal impact on
volumes, protecting gross margins and net income. But for many operating in the more discretionary
end of the wallet, a strategic decision will have to be taken on pricing. With cost pressures also mounting
in areas such as staffing, transport and energy costs, businesses have tough decisions to make which
effect both customers and shareholders. Retailers with healthy balance sheets and healthy margins
can afford to play the wait and see game, keeping prices the same in order to protect or gain market
share. Following a sustained period of strong consumer fundamentals, UK retail generally finds itself
benefitting from a strong capital base, thereby giving many businesses the option of riding out a few
years of uncertainty.
Retailers will be working closely with their banking partners to ensure they are receiving sufficient
support throughout this period of turbulence. Immediate priorities will include supply chain security and
mitigating any further volatility in Sterling. While the outlook is currently one of uncertainty, our
respective industries are adept to dealing with significant change and will remain fundamental to the
prosperity of the UK economy.
Members of the RTT are:
• Nick Bubb – Retail Consultant • Dr. Tim Denison – Ipsos Retail Performance • Martin Hayward – Hayward Strategy and Futures • James Knightley – ING • James Sawley - HSBC • David McCorquodale – KPMG • Maureen Hinton – Verdict Retail • Mike Watkins – Nielsen UK • Martin Newman – Practicology • Jonathan De Mello - Harper Dennis Hobbs
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance. First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter. The RTT was founded by KPMG and Ipsos Retail Performance (formerly Synovate) in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
For media enquiries please contact: Simon Wilson PR Assistant Manager, KPMG UK LLP Tel: +44 (0)207 311 6651 / +44 (0)778 537 3397 Email: [email protected] Max Bevis, Tank PR Tel: +44 (0)1159 589 840 Email: [email protected]